An Open EconomyThe U.S. is a very large and openeconomy – it imports and exports hugequantities of goods and services. Over the past four decades, internationaltrade and finance have becomeincreasingly important.

The Flow of Goods: Exports,Imports, Net ExportsA trade deficit is a situation in which netexports (NX) are negative.Imports > Exports A trade surplus is a situation in which netexports (NX) are positive.Exports > Imports Balanced trade refers to when net exports arezero – exports and imports are exactly equal.

Factors That AffectNet ExportsThe tastes of consumers for domestic andforeign goods. The prices of goods at home and abroad. The exchange rates at which people canuse domestic currency to buy foreigncurrencies.

The Flow of Capital: NetForeign InvestmentWhen a U.S. resident buys stock inTelmex, the Mexican phone company, thepurchase raises U.S. net foreigninvestment. When a Japanese residents buys a bondissued by the U.S. government, thepurchase reduces the U.S. net foreigninvestment.